Big Changes Could Be Coming in Class Action Litigation

On February 10, 2017, U.S. Rep. and House Judiciary Committee Chairman, Bob Goodlatte (R-Va), introduced a new version of his Fairness in Class Action Litigation Act of 2017 (H.R. 985) (the "Act"). The Act, while bearing the same name as legislation introduced by Rep. Goodlatte in the last Congress, is more aggressive than its predecessor in its attempt to cut down on lawyer-driven suits, ensure that legitimate plaintiffs' interests are properly placed ahead of class counsel's interest in securing large fee awards, and diminish other abuses of the class action system. While the Act has yet to be voted on by the House of Representatives or the Senate, the House Judiciary Committee approved the bill on February 15, 2017 and there is growing support for the legislation from the United States Chamber of Commerce, among other organizations. If approved in its current form, the Act would implement the following major class action reforms:

All class members must have suffered the same "type and scope" of injury. The Act would limit certification of class actions only to those suits where the court has determined, after a "rigorous analysis of the evidence presented," that each member of the proposed class has suffered the same "type and scope of injury as the named class representative."This would be a major departure from the current framework, which permits certification of classes even where there is wide variety of injuries across class members, including some with no monetary damage at all.

Class counsel must disclose conflicts of interest to the court. The Act would require class counsel to disclose, in the complaint, whether any proposed class representative or named plaintiff (i) is related to class counsel, (ii) has ever been employed by class counsel, (iii) has ever been a client of class counsel on another matter, or (iv) has any contractual relationship with class counsel other than with respect to the class action suit at issue. If the answer to any of these questions is "yes," class certification must be denied. This provision is designed to prevent plaintiffs' lawyers from recruiting family members, employees and serial plaintiffs to serve as named plaintiffs in manufactured, unmeritorious class action suits.

Class representatives must demonstrate, as a condition precedent to class certification, that there is a reliable and feasible method for distributing any recovery to the class members. Under the current framework, a class representative seeking class certification bears the burden of establishing that its method for identifying class members is reliable and administratively feasible. The Act would keep these requirements in place, but also require the class representative to affirmatively demonstrate that it has a reliable and administratively feasible method "for distributing directly to a substantial majority of class members any monetary relief secured for the class."

Discovery is automatically stayed during the pendency of a motion to transfer or dispositive motion. Taking a page from the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which imposes an automatic stay of discovery and all other proceedings in securities class actions during the pendency of a motion to dismiss, the Act would automatically stay all discovery and other proceedings during the pendency of a motion to transfer, motion to strike class allegations or other motion to dispose of the class allegations, "unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." The PSLRA contains the exact same exception to its automatic stay and, as a result, much of the case law interpreting the PSLRA's exception for "particularized discovery" would likely be applied in determining whether to grant an exception to the discovery stay for class actions generally under the Act.

Attorneys' fees must be proportionate to the recovery and may not be paid until all class members have been paid. The Act would prohibit the determination or payment of attorneys' fees to class counsel until all class members have been paid their monetary distribution. It would also limit class counsel's fee awards to a reasonable percentage of payments actually made to the class members (or, if equitable relief only is obtained, to a reasonable percentage of the value of the equitable relief). Class counsel would not be permitted to recover fees in excess of the amount actually distributed to class members.

Settlement data would be made available to Congress. In cases where a class-wide settlement for money damages is reached, the Act would prohibit the payment of attorneys' fees to class counsel until class counsel submits an accounting to the Federal Judicial Center and the Administrative Office of the United States Courts, which discloses: (i) the total amount paid by the defendant directly to all class members; (ii) the actual or estimated total number of class members; (iii) the average amount paid directly to all class members; (iv) the largest amount paid to any class member; and (v) the smallest amount paid to any other person (including class counsel) and the purpose of the payment. This data would be compiled by the Judicial Conference of the United States and presented, on an annual basis, to the congressional judiciary committees.

Class counsel must disclose third-party litigation funding. The Act would require class counsel to promptly disclose to the court and all other parties the identity of any third party, other than a class member or counsel of record, who has a contingent right to receive compensation from any settlement, judgment or other relief obtained. This provision, which is designed to reveal who really is driving the litigation and the reasons therefor, is likely to draw a sharp response from those in the burgeoning litigation funding business.

Personal injury plaintiffs in MDL proceedings must satisfy an initial evidentiary hurdle. The Act would require any personal injury plaintiff whose action has been coordinated or consolidated in a multi-district litigation proceeding to make a submission to the court within 45 days of the case's coordination or consolidation, sufficient to demonstrate that there is evidentiary support for the factual contentions in the complaint regarding the alleged injury, the exposure to the risk that caused that injury and the alleged cause of the injury. Within 30 days of that submission, the court would be required to rule on whether the submission is sufficient and, if it is not, the plaintiff's action would be dismissed without prejudice. The plaintiff would then have 30 days to remedy the deficiencies in her submission, failing which the action would be dismissed with prejudice.

Parties would be statutorily entitled to appeal class certification decisions as of right. Currently, the Circuit Courts of Appeals have discretion in deciding whether to accept appeals of class certification orders under Federal Rule of Civil Procedure 23(f). The Act would remove that discretion and give litigants an absolute right to appeal the granting or denial of a class certification order. This is the one provision of the Act that could be a double-edged sword for defendants: on the one hand, it would entitle them to an immediate appeal of an order granting class certification; on the other hand, plaintiffs who are denied class certification would likely use the appeal as of right mechanism as a way to put settlement pressure on defendants.

We will keep an eye on further developments as the Act moves its way through Congress.

Rob Stern, a partner in the Washington, D.C., and New York offices, has extensive experience litigating civil and government enforcement actions on behalf of financial services institutions, Fortune 100 companies and officers and directors of public companies.

Rob has also represented numerous
companies and individuals before the Securities and Exchange Commission and in
FINRA arbitrations.

From starting his career handling some of the most complex shareholder
securities class actions suits of the decade to navigating the unknown terrain
of post-crash mortgage-backed products litigations and investigations, Rob
has been involved with many of the most complex and challenging securities
class actions and SEC enforcement matters over the past 20 years. He also has
particular expertise litigating mortgage-backed securities and structured
products claims, accounting fraud matters as well as claims involving
derivative instruments. Rob routinely represents financial institutions,
residential mortgage originators, and mortgage servicers in civil litigation and
regulatory enforcement matters.

Rob is a faculty member for the
Practicing Law Institute’s Securities Litigation program. Rob has also been
nationally recognized as a leader in securities litigation by The Legal
500 and SuperLawyers.
Prior to joining Orrick, Rob was a partner at O’Melveny & Myers LLP.

Gregory Beaman focuses his practice on complex commercial
litigation, with an emphasis on class actions, business tort and high value contract disputes in a broad
range of industries, including finance, technology, manufacturing and
healthcare.

Stay of patent infringement and California law tort claims against Toshiba Corporation on the ground that the arbitrability of those claims had to be decided by an ICC tribunal, which ultimately resulted in dismissal of all claims, with prejudice, in both federal court action and related ICC arbitration. See BaySand Inc. v. Toshiba Corp., 2015 WL 7293651 (N.D. Cal. 2015).

Dismissal of class action claims, with prejudice, against Johnson Controls, Inc. for alleged violation of the Federal Wiretap Act and D.C. Wiretap Act arising out of its installation of security cameras at the Washington, D.C. VA Medical Center (D.D.C. 2015).

While in law school, Greg served as a judicial intern to the Honorable Ronna Lee Beck of the Superior Court of the District of Columbia and as a law clerk in the Criminal Division of the United States Attorney's Office for the District of Maryland.

Greg has also co-authored numerous articles appearing in publications such as the Harvard Law School Forum on Corporate Governance and Financial Regulation, New York Law Journal, Law360, and Delaware Business Court Insider.

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